Stocks Down Sharply On Inflation And Recession Fears  Image: Bigstock Stocks plunged yesterday, erasing Wednesday's gains after the Fed cut interest rates by 75 basis points. In Wednesday's Fed announcement, they also said they were on pace for three more 50 basis point hikes and one 25 basis point hike by year's end. Although, they left the door open for another 75 basis point increase at the their next meeting in July. The more aggressive stance came after last week's CPI report showed inflation increasing to 8.6% y/y (a new high for this year, and a 41-year high overall), rather than moderating as expected. Investors cheered the more aggressive action since they have been so slow to act. But the fear is that they may reduce demand so much to where we fall into a recession. With both the S&P and Nasdaq in bear markets, traders have already concluded that we will wind up in a recession. Q1 GDP was down -1.5%. And with the latest GDP Now forecast by the Federal Reserve Bank of Atlanta estimating that Q2 GDP will be flat (0.00%), which is down from roughly 2% just short while ago, it's looking likely that could be the case if further revisions lower it even more. Granted, a recession is defined as 2 quarters in a row of negative GDP. But even if Q2 is flat or positive after all, there's no denying there's been a marked slowdown this quarter. The question then becomes, how long does this slowdown last? The Fed is estimating that the economy will advance throughout the rest of the year, putting full-year GDP at 1.7% by year's end, and then 1.7% again in 2023. So the Fed is not expecting a recession, and is still forecasting growth. But the market seems to be discounting that forecast. At least for the moment. Data (and fear) has a way of changing people's minds and perception. And while last week's CPI report weighed on the market, we could very well see some new news or data that ends up lifting the market. Because one thing is clear, there's plenty of positives in the economy right now that have been virtually ignored during this sell-off, including a strong labor market (near 50-year low unemployment), strong household spending, strong business investment, and strong industrial production. And eventually, the market will have to take notice. But for now, the market is pricing in the worst.
In the meantime, stock valuations continue to plummet, all while corporate earnings remain strong. That's pushing valuations to multi-year lows. And that means there are some great bargains out there. No need to jump in on them all at once. But taking some nibbles at stocks that are trading at levels you could only have dreamed about a few months, or even years ago, could prove to be a profitable move. Best,  Kevin Matras
Executive Vice President, Zacks Investment Research | 
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